Policy rate raised by another 125bps to 15.0%; highest since 1999

In the monetary policy meeting held today (7th Jul’22), the State Bank of Pakistan (SBP) has increased the benchmark policy rate by 125bps to 15% (highest since March 1999). Moreover, rates on EFS and LTFF loans have been linked to the policy rate, in-line with our expectations, at a 500bps discount though (to 10%), so as to continue incentivizing exports while ensuring monetary tightening penetrates effectively. Together, these steps will ensure a “soft landing of the economy” at a time when global dynamics remain challenging, while also cooling down economic activity, steering inflation towards expectations and providing support to the Rupee in the backdrop of multi-year high imports and record imports.

Key observations since the last MPC:

The MPC highlighted three positive developments since the MPC in May’22

Firstly, the energy subsidy was reversed and Budget for FY23 with focus on fiscal consolidation was passed. This has paved the way for completion of the IMF talks currently underway, hence opening up other avenues to meet external financing requirement.

Moreover, China provided a much needed USD 2.3bn commercial loan to curb the slip in FX reserves.

Lastly, continuous momentum in economic activity from the last two years has been rolled over in the beginning of FY23. This signals that risk of trade-off between growth and inflation is much lower for Pakistan compared to other countries in the post-COVID recovery period.

However, adverse developments have overshadowed the aforementioned.

Inflation globally has touched a multi-decade high and as a result, Central Banks have responded aggressively which has triggered most emerging market currencies to show weakness.

Despite concerns of a slowdown in global growth, Central Banks have continued to prioritize tightening suggesting how vital it is to contain inflation at this stage.

On the domestic front, reversal in the energy subsidies propelled headline and core inflation to rise to a 14-yr high to 21.3% in Jun’22. Secondary market yields and cut-off in the government’s auctions also rose.

Courtesy- AHL Research

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